I was wondering though, since the TRA fund has my desired AA, is there any point in changing to a 3 fund portfolio at this time? The TRA fund is in a tax deferred account and I have no assets in taxable accounts. I understand that a TRA fund would not be tax efficient in a taxable account due to the bond component but I don't have this issue.

Is there anything I'm missing or am I just over thinking it?

Thanks for your help. This forum is invaluable.

Slowly,

If you look under the hood of your 2040 Fund, and the components look OK, you may as well let sleeping dogs lie. The fund is more or less an implementation of the 3-fund portfolio.

My own bias is towards the LifeStrategy funds. They are perhaps closer to a pure 3-fund philosophy, and they have a fixed AA. The TR funds however have an AA that is on a glide path, changing over time.

L.

You can get what you want, or you can just get old. (Billy Joel, "Vienna")

I was wondering though, since the TRA fund has my desired AA, is there any point in changing to a 3 fund portfolio at this time? The TRA fund is in a tax deferred account and I have no assets in taxable accounts. I understand that a TRA fund would not be tax efficient in a taxable account due to the bond component but I don't have this issue.

Is there anything I'm missing or am I just over thinking it?

Thanks for your help. This forum is invaluable.

SlowlyButSurely:

Vanguard's Target and Life-Cycle funds, structured by Vanguard experts, are essentially the same as the Three Fund Portfolio and even simpler because everything is in one fund and will not require rebalancing between funds.

Target and Life-Cycle funds are tax-inefficient because they hold taxable bonds. This does not matter if we have only tax-advantaged accounts like IRAs and 401ks. However, if we have both tax-deferred and taxable accounts, it can matter a lot.

The Three Fund Portfolio allows us to put tax-inefficient Total Bond Market fund in our tax-advantaged accounts and put tax-efficient Total Stock Market and Total International funds into our taxable account. The result is a more tax-efficient overall portfolio with higher after-tax return.

abuss368 wrote:The only difference between the Target and Life Strategy funds and the Three Fund Portfolio is the both the Target and Life Strategy funds include the new Vanguard Total International Bond Index fund.

abuss368 wrote:The only difference between the Target and Life Strategy funds and the Three Fund Portfolio is the both the Target and Life Strategy funds include the new Vanguard Total International Bond Index fund.

abuss368 wrote:The only difference between the Target and Life Strategy funds and the Three Fund Portfolio is the both the Target and Life Strategy funds include the new Vanguard Total International Bond Index fund.

I do not understand why Vanguard does not offer Admiral shares for the Target Retirement funds. Is it a result of the fund being a fund of funds?

A valid question, and one I've had as well. Heck, I'd even support bumping the typical 10K Admiral upgrade amount to 30 or 50K for those funds since they are, as you said, funds of funds.

My calculations for TD2040, for example, have a 8.7bps expense ratio for the funds using all Admiral shares vs. the 18 bps for the target date fund. Of course, to be fair, one would have to have about 450K invested to hit the 10K minimum for the smallest component of the target fund: international bonds at 2.1%

I was wondering though, since the TRA fund has my desired AA, is there any point in changing to a 3 fund portfolio at this time? The TRA fund is in a tax deferred account and I have no assets in taxable accounts. I understand that a TRA fund would not be tax efficient in a taxable account due to the bond component but I don't have this issue.

Is there anything I'm missing or am I just over thinking it?

Thanks for your help. This forum is invaluable.

SlowlyButSurely:

Vanguard's Target and Life-Cycle funds, structured by Vanguard experts, are essentially the same as the Three Fund Portfolio and even simpler because everything is in one fund and will not require rebalancing between funds.

Target and Life-Cycle funds are tax-inefficient because they hold taxable bonds. This does not matter if we have only tax-advantaged accounts like IRAs and 401ks. Hwwever, if we have both tax-deferred and taxable accounts, it can matter a lot.

The Three Fund Portfolio allows us to put tax-inefficient Total Bond Market fund in our tax inefficient accounts and put tax-efficient Total Stock Market and Total International funds into our taxable account. The result is a more tax-efficient overall portfolio with higher after-tax return.

Taylor, I followed your suggestion and converted all my funds to the 3 Fund Portfolio. I placed the Total Stock Market and Total International in my taxable and Total Bond in Roth IRA. To be the most tax efficient, is my setup the correct way? Or is putting Total Stock, Total International and Total Bond together in Roth IRA the most tax efficient?

Taylor, I followed your suggestion and converted all my funds to the 3 Fund Portfolio. I placed the Total Stock Market and Total International in my taxable and Total Bond in Roth IRA. To be the most tax efficient, is my setup the correct way? Or is putting Total Stock, Total International and Total Bond together in Roth IRA the most tax efficient?

BrightFuture1:

It is nearly always better (except for short-term goals) to place all three funds in tax-advantaged accounts if you have room. If space in tax-advantaged accounts is not large enough, put Total Stock Market and/or Total International in the taxable account.

Use this Morningstar tool to help determine if you should use a Roth or Traditional IRA:

BrightFuture1 wrote:
Taylor, I followed your suggestion and converted all my funds to the 3 Fund Portfolio. I placed the Total Stock Market and Total International in my taxable and Total Bond in Roth IRA. To be the most tax efficient, is my setup the correct way? Or is putting Total Stock, Total International and Total Bond together in Roth IRA the most tax efficient?

thanks!

There are two approaches to portfolio management and both have advantages and disadvantages.

* Equal Location - same funds in the same accounts (Total Bond Index can be substituted for Intermediate Term Tax Exempt in taxable accounts).

* Asset Location - different funds in different accounts.

Rick Ferri and his firm Portfolio Solutions recommend "equal location" as the best practice. Rick noted that over a lifetime of investing it may be the most tax efficient as the tax code is in a constant state of change. He also noted it is certainly the easiest to manage and rebalance. This is the strategy I also use.

At the end of the day either strategy over the long term is fine. We are probably splitting hairs and dancing on the head of a needle. The Philosophy is the same and that is low cost, low turnover, passive index funds, no active management or individual stocks, save and invest more than you spend, and stay the course. Who is anyone to say one strategy works better than another?

Each investor must determine what works best for them.

John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" |
|
Disclosure: Three Fund Portfolio + U.S. & International REITs

abuss368 wrote:The only difference between the Target and Life Strategy funds and the Three Fund Portfolio is the both the Target and Life Strategy funds include the new Vanguard Total International Bond Index fund.

abuss368 wrote:The only difference between the Target and Life Strategy funds and the Three Fund Portfolio is the both the Target and Life Strategy funds include the new Vanguard Total International Bond Index fund.

abuss368 wrote:I do not understand why Vanguard does not offer Admiral shares for the Target Retirement funds. Is it a result of the fund being a fund of funds?

brianH wrote:A valid question, and one I've had as well. Heck, I'd even support bumping the typical 10K Admiral upgrade amount to 30 or 50K for those funds since they are, as you said, funds of funds.

ER 0.18% is already extremely low and the simplicity makes using a Target or LifeStrategy fund worthwhile.

Also, Vanguard appears to offer some kind of institutional shares or some kind of arrangement they can whip together for employer accounts. On occasion we seem them posted here @ ER 0.11% and 0.8%. For example:

abuss368 wrote:
Also, Vanguard appears to offer some kind of institutional shares or some kind of arrangement they can whip together for employer accounts. On occasion we seem them posted here @ ER 0.11% and 0.8%. For example:

This is true, and a point I forgot to mention. I actually left a chunk of money in an ex-employer's plan because the target funds are offered at 11bps. Of course, there's a quarterly management fee of around $15, but the amount I have in there still works (barely) vs. the 18bps I'd get on my own rollover.

The authors (Rick Ferri and Alex Benke) created a basic 60-40 portfolio with three of the most commonly held asset classes: 40% in a broad U.S. equity fund, 20% in a broad international equity fund, and 40% in a U.S. investment-grade bond fund.

They then compared this all-index portfolio to 5,000 portfolios of randomly selected, comparable actively managed funds over a 16-year period (1997 to 2012).

The basic result was eye-opening, but not unexpected: The all index (3-fund) portfolio outperformed the active ones 82.9% of the time during the 16-year period.

I'm only thinking hypothetically (and I apologize if it's already been asked - I didn't read the entire thread)... at what point would you transition away from or include other types of investments to prepare for or during retirement?

Shastic wrote:I'm only thinking hypothetically (and I apologize if it's already been asked - I didn't read the entire thread)... at what point would you transition away from or include other types of investments to prepare for or during retirement?

What would an example of this be?

I am far from retirement, so take this with a grain of salt, but I would not transition away from or include anything else as an investment. However, I would revaluate how much of each component you want, such as decreasing Total Stock and Total International and increasing Total Bond.

However, I would also consider SPIAs (a search will find many threads about them) to transition whatever part I am comfortable with of the above investments to an income stream. I do NOT consider this "investing" as much as buying a level of income. Personally, I plan to do some base level as a SPIA to ensure I never live under a cardboard box, and then leave my investments to provide "the better lifestyle" above that. Social Security, if it is still anything like it is today when I get it, would be my inflation bonus.

I have been on a personal mission to self educate about finance and investing for the past year. It all started when I saw "The Retirement Gamble" on PBS. The part with a guy named, John Bogle, really struck something in me. I took Dr. Bersteins advice and spent a lot of time reading books. I have read all of Bogle's, Berstein's, Swedroe's, and Ferri's books. I have read nearly everything Bernstein recommends on his efficient frontier website. I really like the financial history books. I have read all of the "classics" including, "A random walk down wall street" and "Devil take the hindmost." I finally decided on an AA that included tilting to small and value. The book by Frank Armstrong and the Tweedy Browne pamphlet were the most convincing on the FF research and the "value premium". A speech Bogle recently gave really shook my seemingly rock solid belief in value tilting. The speech was "The telltale chart". I have really been thinking a lot about the efficient frontier, negatively correlating assets, the small value risk and behavior "story" and the EMH. I have a question for all the Bogleheads. How can anyone argue that there is a more efficient portfolio than the market portfolio? Especially if one believes, as I do, in Bogle's Cost Matters Hypothesis? How can one implement a better risk adjusted portfolio net of fees and expenses than the infamous 3 fund portfolio?

His book recommends specifically against certain types of asset classes including: Coporate bonds, High yield bonds, Muni bonds, and Foreign bonds. Treasury bonds and TIPS are what's recommended for bonds. And this to me makes sense since with bonds you are being risk-averse which would mean take the highest quality bonds available: those issued by the feds. Because if the US federal government goes kaput...well then we better start stock up on canned foods and fuel...

His book recommends specifically against certain types of asset classes including: Coporate bonds, High yield bonds, Muni bonds, and Foreign bonds. Treasury bonds and TIPS are what's recommended for bonds. And this to me makes sense since with bonds you are being risk-averse which would mean take the highest quality bonds available: those issued by the feds. Because if the US federal government goes kaput...well then we better start stock up on canned foods and fuel...

You might want to read what Rick Ferri has to say about Total Bond Fund.

There are two schools: Slice and dice, don't invest in this, overweight that; and total market. Both factions have reason to criticize TBM. Personally, I don't worry about it.

L.

You can get what you want, or you can just get old. (Billy Joel, "Vienna")

His book recommends specifically against certain types of asset classes including: Coporate bonds, High yield bonds, Muni bonds, and Foreign bonds. Treasury bonds and TIPS are what's recommended for bonds. And this to me makes sense since with bonds you are being risk-averse which would mean take the highest quality bonds available: those issued by the feds. Because if the US federal government goes kaput...well then we better start stock up on canned foods and fuel...

Yep, and at the same time we have Mr. Bogle suggesting the index used by TBM is too heavy in Treasuries and that people might consider adding more corporates, etc.

Listening to noise might be entertainment or not, but it doesn't help the investor. I come down on the side of Taylor's observation that when there is this much discussion about something it is probably because there is very little going on that actually matters.

The rule that always applies is that return is accompanied by risk and the investor should choose accordingly. The two classic risks for bonds are credit quality and duration, so you pay your money and you take your choice.

The second factor is that most of us are not making investments in bonds; we are investing in portfolios and it is the risk and return of the portfolio that matters. If you own both stocks and bonds, then it doesn't make a lot of sense to speak of being risk adverse or not risk adverse in any one component. Virtually all bonds are enough less risky than stocks to allow effective dilution of portfolio risk. One can refine the analysis to greater and greater degree and less and less purpose as one works down through high yield, corporate, munis, Treasuries and TIPS, long and short.

His book recommends specifically against certain types of asset classes including: Coporate bonds, High yield bonds, Muni bonds, and Foreign bonds. Treasury bonds and TIPS are what's recommended for bonds. And this to me makes sense since with bonds you are being risk-averse which would mean take the highest quality bonds available: those issued by the feds. Because if the US federal government goes kaput...well then we better start stock up on canned foods and fuel...

True but TIPS declined during the financial crisis and Total Bond did not.

John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" |
|
Disclosure: Three Fund Portfolio + U.S. & International REITs

Leeraar wrote:You might want to read what Rick Ferri has to say about Total Bond Fund.

There are two schools: Slice and dice, don't invest in this, overweight that; and total market. Both factions have reason to criticize TBM. Personally, I don't worry about it.

L.

True. I am total market in my equity assets since the total approximates market cap distributions and all that. With Bonds it feels like it's a bit different animal. When people talk about being 100% stock the answer is almost always "you need to have some bonds to help you sleep at night."

And I'm still learning about bonds because I know little about it. Seems that equities are bit simpler to understand than bonds and the different types of bonds seems to be quite bit different as well.

Reading book called "The Bond Book" and it has been quite illuminating so far. In the books I've read so far (Bogleheads, Bernstein, Swensen's) I've yet to come across one that really delves into what are the diff types of bonds and how to invest in them. Most just say to invest in indexes in stocks and bonds. Still learning of course.

Leeraar wrote:True but TIPS declined during the financial crisis and Total Bond did not.

Interesting. Again I'm still learning regarding bonds but what does that one-time data point tell about usefulness of TIPS in a long-term investment/retirement portfolio?

dbr wrote:The second factor is that most of us are not making investments in bonds; we are investing in portfolios and it is the risk and return of the portfolio that matters. If you own both stocks and bonds, then it doesn't make a lot of sense to speak of being risk adverse or not risk adverse in any one component. Virtually all bonds are enough less risky than stocks to allow effective dilution of portfolio risk. One can refine the analysis to greater and greater degree and less and less purpose as one works down through high yield, corporate, munis, Treasuries and TIPS, long and short

As I mentioned in this post ealier, I'm still learing about bonds so I know I did my best to put my money to work for my portfolio. And while I'm reading "The Bond Book" my understanding of bonds, through opinions on here and in the books I"ve read so far....seems to suggest that bonds are basically the counter-balance to equity. And with bonds the whole point is NOT to generate huge returns (as is equity) but to protect assets by having a different risk profile than equities...and hopefully less risky.

So would it make sense to choose the types of bonds that are the least risky in terms of credit quality and interest-rate risk? AKA, only buy US Govt bonds (Treasury, TIPS) because they are considered impossible to default (though we were close to that a few months ago.....) and then to avoid super-long term bonds and hold intermediate-length bonds so as to mitigate interest rate risk?[Quotes fixed by admin LadyGeek]

ginmqi wrote:
So would it make sense to choose the types of bonds that are the least risky in terms of credit quality and interest-rate risk? AKA, only buy US Govt bonds (Treasury, TIPS) because they are considered impossible to default (though we were close to that a few months ago.....) and then to avoid super-long term bonds and hold intermediate-length bonds so as to mitigate interest rate risk?

I think the best option in bonds for portfolios about equally mixed stocks and bonds would be intermediate duration high credit quality, not to exclude corporate bonds necessarily but also not to reach for yield. I don't think it matters a lot between total bond market, some other intermediate index, intermediate treasuries, intermediate TIPS, etc. CD's and stable value funds are also appropriate investments depending on available rates. The investor holding almost entirely bonds might think more carefully about what best suits his needs. The investor holding almost no bonds could in fact consider long bonds, or just stick with intermediate. This is an area that seems to be vastly over-thought generating needless anxiety.

Phineas J. Whoopee wrote:
Amen brother. I found myself chuckling a few posts earlier in this thread not because what posters said was funny or silly, but because I could probably sleep still better at night using sedative-hypnotics, or alcohol, or sheer boredom. Bonds, for all the interest-rates-fluctuate angst, are probably the least toxic means, but if that sleep aid is causing people to lose sleep, well, that's the perverse nature of the Universe fer ya right there.
PJW

Exactly. Keep bond investing and investing in general simple and very effective. The Three Fund Portfolio, which includes the Total Bond Index does just that. Please stop back with any additional questions or concerns you may have.

John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" |
|
Disclosure: Three Fund Portfolio + U.S. & International REITs

Thanks for all the opinions/advice. Only reason I'm anxious about bonds is simply due to the fact that I'm a new investor and I know that I do not know enough about bonds at this point. And so I'd like to learn more before I put my money into them. I think I understand equity assets enough at this point and I wholeheartedly agree with the broad index passive approach. I've seen threads where people split hairs over tilting/weighing their equity assets and that I decide not to do as I believe that's more work and headache than necessary.

In the end I think it can be boiled down to more simpler terms of: US govt bonds and/or coporate bonds? Swensen say to avoid corporate, others say having both is fine. I'm not in the business of nit-picking and maximizing any risk-reduction/yield by analyzing all kinds of bonds and bond funds. Basically trying to make a decision as to which types of bonds I'd like to have in my portfolio to meet my needs and in the end I'll need to continue to read and make a decision that will let me sleep like a baby at night.

To me, stocks in the various publically traded companies are fairly similar...basically you own a small part of that and as they grow you get a little piece of the pie. Bonds, though, are a slightly different animal and so the different types of bonds with regards to US govt vs corporate and I'm trying to learn more about the diff types so that I can make a more informed investment decision.

ginmqi wrote:Thanks for all the opinions/advice. Only reason I'm anxious about bonds is simply due to the fact that I'm a new investor and I know that I do not know enough about bonds at this point. And so I'd like to learn more before I put my money into them. I think I understand equity assets enough at this point and I wholeheartedly agree with the broad index passive approach. I've seen threads where people split hairs over tilting/weighing their equity assets and that I decide not to do as I believe that's more work and headache than necessary.

In the end I think it can be boiled down to more simpler terms of: US govt bonds and/or coporate bonds? Swensen say to avoid corporate, others say having both is fine. I'm not in the business of nit-picking and maximizing any risk-reduction/yield by analyzing all kinds of bonds and bond funds. Basically trying to make a decision as to which types of bonds I'd like to have in my portfolio to meet my needs and in the end I'll need to continue to read and make a decision that will let me sleep like a baby at night.

To me, stocks in the various publically traded companies are fairly similar...basically you own a small part of that and as they grow you get a little piece of the pie. Bonds, though, are a slightly different animal and so the different types of bonds with regards to US govt vs corporate and I'm trying to learn more about the diff types so that I can make a more informed investment decision.

You may want to consider starting a new thread geared towards your bond concerns and questions. You will probably receive a lot more focused responses as a result.

John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" |
|
Disclosure: Three Fund Portfolio + U.S. & International REITs

I will be interested in following the new Vanguard Total International Index Bond Fund in the years ahead to see how it performs and develops. Vanguard is really pushing the Four Fund Portfolio in their articles, research, video's, and now the Target and Life Strategy funds!

John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" |
|
Disclosure: Three Fund Portfolio + U.S. & International REITs

I am concerned about what seems to be the same philosophy that applies to stocks (which I 100% agree with) and applying it to bond funds. After a first read of Thau's Bond Book, it seems that individual bonds and bond funds are quite the different animals. I think it may be useful to start a discussion regarding the reasoning and logic behind a bond fund, which I'm still not completely sold on just yet.

ginmqi wrote:I am concerned about what seems to be the same philosophy that applies to stocks (which I 100% agree with) and applying it to bond funds. After a first read of Thau's Bond Book, it seems that individual bonds and bond funds are quite the different animals. I think it may be useful to start a discussion regarding the reasoning and logic behind a bond fund, which I'm still not completely sold on just yet.

I would consider starting another thread regarding your concerns. I too have also read The Bond Book. I would also recommend any of Jack Bogle's books regarding bond funds.

John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" |
|
Disclosure: Three Fund Portfolio + U.S. & International REITs

The Three Fund Portfolio has been called a "cookie cutter" portfolio. A reader asked Mike Piper, editor of the highly regarded Oblivious Investor:

Why would I want to pay for a (Vanguard) financial plan if all that’s included in the portfolio is the same four funds that are included in a target retirement fund anyway? That seems like a cookie cutter portfolio.”

Mike replied:

Yes, they are cookie cutter portfolios. And, in my opinion, that’s usually a good thing. -- Ideally, you should only get a different recommended allocation if there’s something about you that makes you unusual. And, the truth is, for most investors, there isn’t.

Taylor, I followed your suggestion and converted all my funds to the 3 Fund Portfolio. I placed the Total Stock Market and Total International in my taxable and Total Bond in Roth IRA. To be the most tax efficient, is my setup the correct way? Or is putting Total Stock, Total International and Total Bond together in Roth IRA the most tax efficient?

BrightFuture1:

It is nearly always better (except for short-term goals) to place all three funds in tax-advantaged accounts if you have room. If space in tax-advantaged accounts is not large enough, put Total Stock Market and/or Total International in the taxable account.

Use this Morningstar tool to help determine if you should use a Roth or Traditional IRA:

The Three Fund Portfolio has been called a "cookie cutter" portfolio. A reader asked Mike Piper, editor of the highly regarded Oblivious Investor:

Why would I want to pay for a (Vanguard) financial plan if all that’s included in the portfolio is the same four funds that are included in a target retirement fund anyway? That seems like a cookie cutter portfolio.”

Mike replied:

Yes, they are cookie cutter portfolios. And, in my opinion, that’s usually a good thing. -- Ideally, you should only get a different recommended allocation if there’s something about you that makes you unusual. And, the truth is, for most investors, there isn’t.

The one "tilt" he doesn't use in his 5, 6 or 8-fund portfolios is an Intermediate-Term Corporate Bond fund... I saw the M*/Bogle interview video that I think Mel Lindauer posted where Bogle thought Intermediate Corp. Bonds could make up for the flaw with the Barclay index. The TBM index gives too much proportion to government bonds and not enough to corporate bonds compared to the actual market proportions. If I remember correctly, it's like 65/35 gov't./corp in the TBM.

But isn't there some reasoning behind the "3 fund" portfolio that has to do with past performance?

This was my reply:

These are the reasons behind the design of The Three Fund Portfolio. None are based on past performance:

* Very diversified with over 15,000 worldwide securities (lower risk).
* Very low-cost.
* Very tax-efficient.
* The advantages of Simplicity
* Fewer but larger funds results in earlier eligibility for Admiral, Voyager and Flagship benefits.
* No adviser risk.
* No fund manager risk.
* No style drift.
* No "asset bloat" problems.
* No tracking error to cause abandonment of the strategy.
* No overlap
* No front-running that reduces sub-index returns.
* On the Efficient Frontier (highest return per unit of risk).
* Automatic rebalancing within each fund.
* Never underperforms the market (less worry).
* Easy to maintain for the owner, spouse, caregivers and heirs.
* More time with family and friends.
* Mathematically certain to outperform most investors.

"Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea." -- Bill Schultheis